Nikkei225 Futures



Nikkei225 Futures - Definition


Nikkei225 Futures are futures contracts offered for trading on Japan's Nikkei225 stock market index, an index tracking 225 stocks in the Japanese stock market.


Nikkei225 Futures - Introduction


The Nikkei225 Futures must be the most commonly traded Asian stock market index futures anywhere in the world, 24 hours a day. In fact, it is also the most traded index futures contract in Asia. Since its beginning in 1986, trading the Nikkei225 Futures has made countless multi-millionaires as well as bankrupts around the world, the most famous of which is Nick Leeson's bankruptcy of Barings Bank in 1995 through Nikkei225 Futures speculation. In fact, there are people in Asia who say that you aren't a real futures trader unless you have traded the Nikkei225 Futures.

This tutorial shall explore in depth what Nikkei225 Futures are, its history, how it is traded, where it can be traded and lots more.


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What Exactly Are Nikkei225 Futures?


Nikkei225 Futures are futures contracts available for trading the Japanese stock market's Nikkei225 Index. The Nikkei225 is a price weighted, yen denominated, stock market index that tracks 225 stocks in the Tokyo Stock Exchange (TSE) and is intended as an index reflecting the overall Japanese stock market. In fact, there are also Nikkei225 index options available for trading.

Nikkei225 Futures allow traders to participate in the movements of the Nikkei225 index and as the most matured index futures in Asia, Nikkei225 Futures are traded not only by Japanese and futures traders all over Asia but also traders everywhere else in the world seeking exposure to the Asian markets. In fact, whenever anyone says that they are trading the "Nikkei" it usually means that they are trading the Nikkei225 Futures.



Where can the Nikkei225 Futures Be Traded?


Nikkei225 futures are listed for trading in the Chicago Mercantile Exchange (CME), Singapore Stock Exchange (SGX) and Osaka Stock Exchange (OSE). You can trade the Nikkei225 Futures from anywhere in the world through most well established online and offline brokers which are connected with SGX or CME. An example of an online broker that offers both options and futures trading including the Nikkei225 Futures is Optionsxpress.com.

Nikkei225 Futures are traded 24 hours a day around the clock due to a system between the SGX and CME known as the "Mutual Offset System" which allows futures contracts opened in one market to be liquidated in the other. This allows the two exchanges to create a single 24 hours marketplace for Nikkei225 Futures trading.



Why Trade Nikkei225 Futures?


Nikkei225 Futures allows investors access to the Japanese stock market, which in the 1980s was growing to be one of the most important capital markets in the world. In fact, the Nikkei225 Futures rode a strong Japanese economic growth to become the most traded index futures in the world by 1990. Even though the Japanese economic slump since 1993 has caused the Nikkei225 Futures to lose much of its appeal, the Nikkei225 Futures continue to be one of the most important index futures in Asia.

Nikkei225 Futures not only grant investors exposure to the Japanese stock market but also grants exposure to the Yen through the yen denominated Nikkei225 Futures. This was extremely attractive to investors as the yen has been generally appreciating against the dollar since the 1970s.

Nikkei225 Futures can also be used for hedging of a portfolio made up of Japanese stocks by going short an equivalent or partial amount of Nikkei225 Futures contracts.



Nikkei225 Futures Products


The SGX and CME trades a common Nikkei225 Futures product with similar specifications as well as options on futures. These are usually known as CME Nikkei225 Futures or SGX Nikkei225 Futures. However, in the OSE, like the S&P500 index futures, the Nikkei225 futures also come with both large contracts and "e-mini" contracts (known as the "Nikkei225 Mini"). There are no "e-mini" version offered in the SGX and CME version because the SGX / CME version are already trading at the OSE Nikkei225 Mini specifications of 500yen per point.

Since 2010, a new Nikkei225 Futures product known as Nikkei225 Dividend Index Futures was introduced in the Tokyo Stock Exchange. This new futures trading product tracks the Nikkei225 Dividend Index, which is an index tracking the dividends receivable from stocks in the Nikkei225 index, designed to help investors hedge against dividend fluctuations.



Nikkei225 Futures Specifications



SGX/CME Nikkei225 Futures Specifications (yen denominated)



Ticker Symbol : NIY

Contract Size : 500 yen per point

Margin : Span margin (about 9%, please check Span margin requirements daily)

Minimum Tick : 5 points = 2500 yen per tick

Contract Months : Mar, Jun, Sep, Dec

Position Limit : 5000 contracts

Last Trading Day : Day before second Friday of expiration month (this is different from the third Friday convention of most other derivative markets)


SGX/CME Nikkei225 Futures Specifications (dollar denominated)



Ticker Symbol : NKD

Contract Size : $5.00 per point

Margin : Span margin (about 9%, please check Span margin requirements daily)

Minimum Tick : 5 points = $25 per tick

Contract Months : Mar, Jun, Sep, Dec

Position Limit : 5000 contracts

Last Trading Day : Day before second Friday of expiration month (this is different from the third Friday convention of most other derivative markets)



Nikkei225 Futures Trading Example



Here are examples of how to trade the Nikkei225 Futures following the "Steps in Trading Futures" tutorial:

Trading Nikkei225 Futures (yen denominated)


John has JPY500,000 in a yen denominated futures trading account and wishes to try his hand at trading yen denominated Nikkei225 Futures. He goes through the steps in trading futures and came up with the below:

Outlook
John is of the opinion that the Nikkei225 will move upwards in the near term from 9000 to 9500 and has decided to go long on the front month Nikkei225 Futures.

Position Sizing & Initial Margin
Each contract of the Nikkei225 Futures requires an initial margin of JPY400,000 and maintenance margin of JPY300,000 according to the Span margin for the day. John has a fund size of JPY500,000 and will only be able to go long on just one contract and will control his maximum loss to 20% of the position using a stop order.

Entry & Stop Loss
John entered the position and because he has a maximum loss tolerance of 20%, he works out his stop loss point as:

400,000 x 0.2 = 80,000 / 2500 = 32 ticks down

Each tick is 5 points so 32 ticks down = 160 points

So his stop order should be placed at 9000 - 160 = 8,840 points. Because the position will be stopped out when the position goes down to JPY320,000, it will never hit the JPY300,000 maintenance margin requirement and John would therefore never recieve a margin call on this trade.


Trading Nikkei225 Futures (dollar denominated)


John has USD5000 in a futures trading account and wishes to try his hand at trading dollar denominated Nikkei225 Futures. He goes through the steps in trading futures and came up with the below:

Outlook
John is of the opinion that the Nikkei225 will move upwards in the near term from 9000 to 9500 and has decided to go long on the front month Nikkei225 Futures.

Position Sizing & Initial Margin
Each contract of the Nikkei225 Futures requires an initial margin of USD5000 and maintenance margin of USD4000 according to the Span margin for the day. John has a fund size of USD5000 and will only be able to go long on just one contract and will control his maximum loss to 20% of the position using a stop order.

Entry & Stop Loss
John entered the position and because he has a maximum loss tolerance of 20%, he works out his stop loss point as:

5000 x 0.2 = 1000 / 25 = 40 ticks down

Each tick is 5 points so 40 ticks down = 200 points

So his stop order should be placed at 9000 - 200 = 8,800 points. Because the position will be stopped out when the position goes down to USD4000, it will never hit the USD4000 maintenance margin requirement and John would therefore never recieve a margin call on this trade.



Brief History of Nikkei225 Futures


Interestingly, the Nikkei225 Futures were not born in Japan but in Singapore. The Nikkei225 index itself was in existence in the Tokyo Stock Exchange since September 7 1950 but the Nikkei225 Futures came into existence only in 1986 at the Singapore Exchange (SGX). It was only in 1988 was the Nikkei225 Futures introduced to Osaka Stock Exchange (OSE) in Japan. CME then listed Nikkei225 Futures for trading in 1990. As such, the SGX is the oldest exchange to list Nikkei225 Futures for trading.

The Nikkei225 Futures were launched in the era of rapid economic growth in Japan due to the undervalued yen. As such, the Nikkei225 exploded and hit its all time high of 38,000 points in 1990, making multi-millionaires of Nikkei225 Futures traders. In fact, nobody could get it wrong going long on the Nikkei225 Futures during those times and that is how so many people are caught, including Nick Leeson of Barings Bank, when the Kobe earthquake took it all away leaving the Japanese economy in a slump.

Despite the economic downturn, futures trading continues as the OSE introduced the Nikkei225 Minis in July 2006, pushing the trading volume of Nikkei225 futures products to an all time high. Nikkei225 Dividend Index Futures were introduced in 2010 despite economic turmoil in the TSE.





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